Jessica Schmitt

Finance
13-11
a.

EBIT
Less Interest
Net Profit before tax
Less taxes
Net profit after tax
Less Preferred dividends
Earnings avail. To common shareholders
Earnings per share

$24,600
$9,600
$15,000
$6,000
$9,000
$7,500
$1,500
$0.38

b.

EBIT
Less Interest
Net Profit before tax
Less taxes
Net profit after tax
Less Preferred dividends
Earnings avail. To common shareholders
Earnings per share

$30,600
$9,600
$21,000
$8,400
$12,600
$7,500
$5,100
$1.28

c.

EBIT
Less Interest
Net Profit before tax
Less taxes
Net profit after tax
Less Preferred dividends
Earnings avail. To common shareholders
Earnings per share

$35,000
$9,600
$25,400
$10,160
$15,240
$7,500
$7,740
$1.94

13-16
a.
Degree of operating leverage:
(100,000*(2-1.70))/((100,000*(2-1.70))-6000)
30,000/24,000 = 1.25
Degree of financial leverage:
24,000/(24,000-10,000)=1.71
Degree of total leverage:
1.25 x 1.71 = 2.14
b.
Degree of operating leverage:
(100,000*(2.50-1.00))/((100,000*(2.50-1.00))-62,500)
150,000/87,500 = 1.71
Degree of financial leverage:
87,500/(87,500-17,500)=1.25
Degree of total leverage:
1.71 x 1.25 = 2.14
c.
Firm W has less financial risk than Firm R, and Firm
R has less operating risk than Firm W.
d.
Even though two firm may set up its structure
differently, they can still be leveraged equally
since the total leverage is the product of both
operating and financial leverage.

13-20
a.
Sales
Less: Variable costs
Less: fixed costs
EBIT
Less: Interest
Earnings before taxes
Less: Taxes
Earnings after taxes

0.2
0.6
0.2
$200,000 $300,000 $400,000
$140,000 $210,000 $280,000
$75,000 $75,000 $75,000
($15,000) $15,000 $45,000
$12,000 $12,000 $12,000
($27,000)
$3,000 $33,000
($10,800)
$1,200 $13,200
($16,200)
$1,800 $19,800

b.
Earnings Per Share
Earnings after taxes
# of shares
Earnings Per Share

0.20
($16,200)
$10,000
-$1.62

0.60
$1,800
$10,000
$0.18

0.20
$19,800
$10,000
$1.98

Expected EPS:
( $1.62x0.20)+($0.18x0.60)+($1.98x 0.20)
(= 0.18)
Standard Deviation
(( -$1.62-$0.18)^2 x 0.20)+ (($0.18-$0.18)^2 x 0.60)+(($1.98-$0.18)^2 x 0.20)
(=$1.14)
coefficient of variation of EPS
1.138/.18 = 6.32
c.
Earnings per share
EBIT
Less: Interest
Net profit before taxes
Less: Taxes
net profit after Taxes
EPS

0.20
($15,000)
$0
($15,000)
($6,000)
($9,000)
($0.60)

0.60
$15,000
$0
$15,000
$6,000
$9,000
$0.60

Expected EPS
( -$0.60x0.20)+($0.60x0.60)+($1.80x0.20)
= $0.60
Standard Deviation

0.20
$45,000
$0
$45,000
$18,000
$27,000
$1.80

(($0.60-$0.60)^2 x 0.20)+(($0.60-$0.60)^2 x 0.60)+(($1.80-$0.60)^2 x 0.20]

(=$0.76)
coefficient of variation of EPS
.759/.60 = 1.265
d.
When debt was included there was a lower EPS, and a
higher standard deviation and coefficient of variation than
the structure that was all equity. When the debt is
eliminted it reduces financial risk significantly.

14-4
a.
1,900,000/400,000 = $4.75/share
b.
160,000/400,000 = $.40/share
c.
In part a, the retained earnings and cash decrease by $1,900,000 each
In part b, the retained earnings and cash decrease by $160,000 each
d.
Retained earnings decrease by $80,000, therefore stockholder's equity is decreased by $80,000.

creased by $80,000.

14-11
a.
80,000/40,000 = $2.00
b.
400/40,000 = 1%
c.
440/44000 = 1% The stock dividend maintains
the same ownership percentage.
d.
22/1.10 = $20/share
e.
Her ownership in the firm will remain the same, and provided the firm's earnings
also stay the same, so will her total share of earnings.

14-19

There are several methods to reducing current quarterly

earnings, like the way revenue is recognized, or restructuring
charges etc. Even though they are all technically legal, I believe
they are unethical and shouldn't be persused, which would be
what I recommend to the CEO. Even if the CEO came to me and
recommended reducing the current quarter's earnings, I would
not feel comfortable doing so since I believe it to be unethical,
and would tell the CEO exactly that.